8 VC Insights from the Genesis of Benchmark Capital
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Whenever you set out on a new venture you benefit from studying what came before. All great acts do this. They do it not only because it accelerates learning but also because it helps identify benchmarks against which future performance can be judged.
On exceptional occasions, it’s possible for a new act to challenge incumbents while completely crushing prior benchmarks, and in the history of venture capital —something I geek out on more than I should — no fund has done so more dramatically than the aptly named Benchmark Capital.
If you’re new to VC and don’t know the genesis of Benchmark, I recommend you seek out a second-hand copy of “Eboys: the First Inside Account of Venture Capitalists at Work.” The book is now over 20 years old but don’t let that put you off. Albert Wenger at USV recommended it to me right before I got started started in venture and it taught me more about the industry than anything I’d come across at the time.
In this blog post I’ll share a few excerpts on insights I gleaned when I read the book but I have to admit, some of the points don’t really hit home until you’ve been a VC for some time. Reading the book before you get into VC and reading it after 2–3 years of investing will reveal different truths and as such, I recommend a hardcover copy that you can return to many times over the course of an investment career.
Before we get to the excerpts (and many of them lack full context so you’ll need to read the book to appreciate all nuances), let me share a little on what Benchmark achieved.
Founded in 1995, Benchmark got off to an insanely great start when it made 600 times its money within 2 years on an investment in eBay. Not on only that, but Benchmark’s first fund returned LP capital 92 times over. Ebay is arguably the best VC investment of all time¹ and ‘Benchmark Capital Partners I’ is the highest performing debut fund of all time.
More specifically, Benchmark invested $6.7m in eBay in 1997 for about 20% of the business. Within 2 years eBay was worth $20.7bn and Benchmark’s stake was valued at $4.2bn. Benchmark effectively made 627 times its original investment and generated an annual rate of return north of 2,000% within 2 years. This investment came out of Benchmark’s first fund ($85m) which altogether returned $7.8bn and made its LPs 92 times their money.
Benchmark has gone on to have more hits (Dropbox, Instagram, Twitter, Uber, Zendesk, to name a few) but it’s the early years of the fund and the coming together of its six key partners — Dave Beirne, Bruce Dunlevie, Bill Gurley, Kevin Harvey, Bob Kagle, Andy Rachleff — where the following lessons were drawn.
The 8 Insights
1. Patience: It takes 5+ years to know whether you’re good.
“The industry held that it took five years before anyone could tell whether a new venture capitalist was going to be successful, and ten years for a single venture fund to fully mature and do its final accounting.” (Page xix)
2. Warm intros: They demonstrate entrepreneurial hustle.
“The business plan that comes in from a complete stranger, either without the blessing of someone the venture capital firm knows well or without professional accomplishments that render an introduction superfluous is all but certain not to make the cut. In fact, knowing that this is the case becomes a tacit requirement from the perspective of a venture guy: Anyone whom I don’t know who approaches me directly with a business plan shows me they haven’t passed Entrepreneurship 101.” (Page 25)
3. Name-brand entrepreneurs: They attract capital and talent.
“Having worked closely with Jim Clark in building Netscape before joining Benchmark, Beirne [a Benchmark partner] knew that the past success of a name-brand entrepreneur was an asset that would allow him to paint a picture of future success, which in turn would attract more capital and more good people. The identical business concept in the hands of an uknown entrepreneur, however, would starve for lack of nourishment.” (Page 34)
4. Name-brand VCs: A ‘winning’ fund brings more than capital.
“…“When I came out here ten years ago,” Borders [the CEO of Webvan] said, “I had a cynical view of venture capital — vulture capital.” But he had subsequently seen that “in order to be able to attract the best people, you need to have the backing of winners. It’s not the money” — he did not realize that that was the exact phrase of eBay’s Pierre Omidyar had just used when he’d gone to Benchmark — “it’s the Rolodex, it’s being backed by the venture firms that have a record of knocking it out of the park.” (Page 35)
5. Founder Service: VCs do best when they truly serve entrepreneurs.
“Regardless of where young venture capitalists worked, there was one universal way for them to promote their own careers: Serve entrepreneurs, the Benchmark refrain. “This isn’t the old days — there’s no longer an old boys’ network,” he [David Beirne] noted, so when capital was a commodity, service was the only way to differentiate oneself. “Managing a Career” was simple: “You will succeed,” he advised, “by helping others succeed.” In his own case, he had discovered so far that it was his prior experience as an entrepreneur, not in high-tech executive search, that had proven to be most useful to the entrepreneurs he was working with. “It’s hard to help entrepreneurs if you haven’t had two A.M. sweats, haven’t made a payroll.”” (Page 92)
6. Loss aversion: You feel failed investments deeper than successful ones.
Here the partners were discussing the impending failure of a portfolio company:
“…“I’m worried about the reputation hit for us,” Bernie said. “Companies go out of business,” Dunlevie said. “Part of your reputation is, companies fail.”
“…He [Rachleff] wasn’t concerned about Benchmark’s overall reputation being badly damaged. “The amazing thing about our business is, everyone forgets the losers — they remember the winners…given the number of winners that you’re associated with, and the firm’s associated with, it won’t be an issue.”
“…You know how many strikeouts John Doerr [Partner at Kleiner Perkins] has had?” Rachleff asked Beirne. “Does anyone care? Will we win because of that? No.”
“Dunevie broke in. “The issue is John Doerr knows and Dave knows. It’s hard. It’s really hard. The only person who cares is you. I’ve been there. And you’re going to care forever. You’ve got to let it go. That’s the best advice I can give you.”
“…Rachleff pointed out that in a portfolio, the emotions that Beirne would experience would always be biased toward the end of the spectrum representing pain. “The amazing thing is it hurts more on the downside than the good feelings on the upside.”…” (Page 193)
7. Paralytic Analysis: VC requires a balance of smarts and courage.
When the Benchmark partners were discussing hiring Bill Gurley:
“…“You think he’d be a good investor?” asked Bruce Dunlevie.
“I do, but the reason I do is because he’s a rare combination of highly intellectually curious and humble. I think he really is open to questioning his own thought process and what’s really working and what’s not.”
“It’s like being around an academic,” said Dunlevie. “He’s got so many ideas spouting forth, I really enjoy talking to him. My fear is that he’ll outthink it.”
“Yeah, that’s a possibility. This is more a balls than brains business, as we’ve said many times. I think having too many brains can hurt you at some level.”” (Page 233)
8. Non-financial rewards: VCs get more out of their work than money.
“…“The really big wins are where all the rewards come from,” Bob Kagle once pointed out, before eBay had gone public. The rewards he was referring to were the emotional ones, not the financial ones, and they were rewards derived not from a game of assuming personal risk — the venture guys had a portfolio across which risk could be spread — but from being backers of entrepreneurs, the ones who commercialized new technology and introduced new products and services — and were the ones who really took on risk. “Nine times out of ten they’re taking on some big, established system of some sort.” He dropped his voice for emphasis: If the individual entrepreneur won, even for the venture guys it produced an “exhilarating feeling” — he groped for the right words — “it’s confirmation that one person with courage can make a difference.”” (Pages 299–300)
Notes
[1] There are two more contenders here but in each case ebay was a faster outcome and so has not just a huge return multiple but also a higher internal rate of return:
- Uber: Benchmark invested $10m in 2011 and made around 800 times its money when the stake grew in value to $8bn in around 10 years.
- Facebook: Accel invested $12.7m in 2005 at a $100m valuation and the business IPO’d in 2012 at a valuation of $104bn. Accel’s stake was worth $9bn-10bn on exit, generating over 700 times the cash invested.
